<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-9627
ZENITH NATIONAL INSURANCE CORP.
[Exact name of registrant as specified in its charter]
Delaware 95-2702776
[State or other jurisdiction of [I.R.S. Employer
incorporation or organization] Identification No.]
21255 Califa Street, Woodland Hills, California 91367-5021
[Address of principal executive offices] [Zip Code]
(818) 713-1000
[Registrant's telephone number, including area code]
Not Applicable
[Former name, former address and former fiscal year, if changed since last
report.]
Indicate by check mark whether the registrant [1] has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and [2] has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Number of shares of Common
Stock, $1 par value per share, outstanding as of close of business on April 30,
1998: 17,042,000 excluding 7,792,000 shares of treasury stock.
<PAGE>
PART l
FINANCIAL INFORMATION
Item 1. Financial Statements.
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
March 31, December 31,
(In thousands, except per share data) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
<S> <C> <C>
Investments
Fixed maturities:
At amortized cost (fair value $45,637 in 1998 and $48,266 in 1997) ...... $ 44,362 $ 46,948
At fair value (cost $494,138 in 1998 and $534,771 in 1997) .............. 500,851 542,479
Floating rate preferred stocks, at fair value (cost $16,614 in 1998
and $14,614 in 1997) .................................................. 17,630 15,670
Convertible and non-redeemable preferred stocks, at fair value
(cost $6,672 in 1998 and 1997) ..................................... 6,951 6,602
Common stocks, at fair value (cost $19,063 in 1998 and $17,790 in 1997) .. 26,024 23,439
Short-term investments (at cost, which approximates fair value) .......... 218,851 209,827
Other investments ........................................................ 36,208 35,008
----------- -----------
TOTAL INVESTMENTS ................................................. 850,877 879,973
Cash (restricted cash $4,589 in 1998 and $5,524 in 1997) ...................... 21,763 12,504
Accrued investment income ..................................................... 9,317 9,523
Premiums receivable ........................................................... 73,636 72,813
Receivable from reinsurers, state trust funds, and
prepaid reinsurance premiums .......................................... 108,105 106,067
Deferred policy acquisition costs ............................................. 20,319 20,840
Properties and equipment, less accumulated depreciation ....................... 54,258 54,531
Federal income taxes .......................................................... 14,653 19,940
Other assets .................................................................. 82,041 75,965
----------- -----------
TOTAL ASSETS ...................................................... $ 1,234,969 $ 1,252,156
----------- -----------
----------- -----------
LIABILITIES
Policy liabilities and accruals:
Unpaid loss and loss adjustment expenses ................................. $ 617,136 $ 613,266
Unearned premiums ........................................................ 127,451 128,469
Policyholders' dividends accrued .............................................. 5,260 5,360
Other policyholder funds ...................................................... 4,582 6,407
Reserves on loss portfolio transfers .......................................... 10,737 11,054
Payable to banks and other notes payable ...................................... 14,147 13,742
Senior notes payable, less unamortized issue costs of
$495 in 1998 and $526 in 1997 ............................................ 74,505 74,474
Other liabilities ............................................................. 36,169 37,518
----------- -----------
TOTAL LIABILITIES ................................................. 889,987 890,290
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par - shares authorized 1,000; issued and outstanding, none
in 1998 and 1997
Common stock, $1 par - shares authorized 50,000; issued 24,814,
outstanding 17,022 in 1998; issued 24,681, outstanding 17,819 in 1997 .... 24,814 24,681
Additional paid-in capital .................................................... 267,118 264,098
Retained earnings ............................................................. 189,133 186,268
Net unrealized appreciation on investments, net of deferred
tax expense of $5,240 in 1998 and $5,025 in 1997 ......................... 9,731 9,332
----------- -----------
490,796 484,379
Less treasury stock at cost (7,792 shares in 1998 and 6,862 shares in 1997) ... (145,814) (122,513)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ........................................ 344,982 361,866
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................ $ 1,234,969 $ 1,252,156
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Three Months Ended
March 31,
(In thousands, except per share data) 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CONSOLIDATED REVENUES:
Premiums earned ............................................... $ 118,784 $ 122,363
Net investment income ......................................... 12,343 12,448
Realized gains on investments ................................. 2,420 1,876
Real estate sales ............................................. 11,748 9,963
--------- ---------
Total revenues ...................................... 145,295 146,650
EXPENSES:
Loss and loss adjustment expenses incurred .................... 83,928 87,767
Policy acquisition costs ...................................... 22,279 23,114
Other underwriting and operating expenses ..................... 15,846 15,176
Policyholders' dividends and participation .................... 57 (968)
Real estate construction and operating costs .................. 11,494 9,704
Interest expense .............................................. 993 1,136
--------- ---------
Total expenses ...................................... 134,597 135,929
Income before federal income tax expense ...................... 10,698 10,721
Federal income tax expense .................................... 3,598 3,621
--------- ---------
NET INCOME .................................................... $ 7,100 $ 7,100
--------- ---------
--------- ---------
EARNINGS PER SHARE:
Net income per common share ................................... $ 0.42 $ 0.40
--------- ---------
--------- ---------
Net income per common share - assuming dilution ............... $ 0.42 $ 0.40
--------- ---------
--------- ---------
Additional Required Disclosure:
Net income .................................................... $ 7,100 $ 7,100
Change in unrealized appreciation/(depreciation) on investments 399 (6,982)
--------- ---------
Comprehensive Income .......................................... $ 7,499 $ 118
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Premiums collected ............................................ $ 121,822 $ 129,052
Investment income received .................................... 12,128 10,872
Proceeds from sales of real estate ............................ 11,748 9,963
Loss and loss adjustment expenses paid ........................ (81,356) (85,454)
Underwriting and other operating expenses paid ................ (38,062) (40,988)
Real estate construction costs paid ........................... (15,775) (9,686)
Reinsurance premiums paid ..................................... (7,213) (6,203)
Dividends paid to policyholders ............................... (157) (1,067)
Interest paid ................................................. -- (259)
Income taxes paid ............................................. (50) --
--------- ---------
Net cash provided by operating activities .................. 3,085 6,230
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Investment securities available-for-sale ................... (74,794) (37,646)
Other investments .......................................... (870) (206)
Proceeds from maturities and redemptions of investments:
Fixed maturities held-to-maturity .......................... 2,528 1,302
Investment securities available-for-sale ................... 32,501 10,458
Other investments .......................................... 83 336
Proceeds from sales of investment securities available-for-sale 81,542 32,136
Capital and other expenditures ................................ (1,144) (1,195)
Net change in short-term investments .......................... (9,024) (6,774)
Other ......................................................... (437) (1,063)
--------- ---------
Net cash provided by (used in) investing activities ........ 30,385 (2,652)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash advanced from bank construction loans .................... 10,446 7,376
Cash repaid on bank construction loans ........................ (10,041) (8,346)
Cash dividends paid to common stockholders .................... (4,225) (4,405)
Proceeds from exercise of stock options ....................... 2,910 1,498
Purchase of treasury shares ................................... (23,301) --
---------
--------- ---------
Net cash used in financing activities ...................... (24,211) (3,877)
--------- ---------
Net increase (decrease) in cash ............................... 9,259 (299)
Cash at beginning of period ................................... 12,504 12,125
--------- ---------
Cash at end of period ......................................... $ 21,763 $ 11,826
--------- ---------
--------- ---------
(continued)
</TABLE>
4
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH FLOWS
FROM OPERATING ACTIVITIES:
Net Income ....................................................... $ 7,100 $ 7,100
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .................................. 1,074 1,237
Realized gains on investments .................................. (2,420) (1,876)
Decrease (increase) in:
Accrued investment income ...................................... 206 (1,349)
Premiums receivable ............................................ (823) (357)
Receivable from reinsurers, state trust funds, and
prepaid reinsurance premiums ................................ (2,038) 1,449
Federal income taxes ........................................... 5,315 3,692
Deferred policy acquisition costs .............................. 521 (20)
Increase (decrease) in:
Unpaid loss and loss adjustment expenses ....................... 3,870 1,748
Unearned premiums .............................................. (1,018) 1,609
Policyholders' dividends accrued ............................... (100) (2,421)
Other policyholder funds ....................................... (1,825) (859)
Other .......................................................... (6,777) (3,723)
--------- ---------
--------- ---------
Net cash provided by operating activities .............. $ 3,085 $ 6,230
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Note 1. Basis of Presentation
In the opinion of management, all adjustments necessary for a fair presentation
of the financial position and results of operations of Zenith National Insurance
Corp. and subsidiaries (collectively, "Zenith") for the periods presented
(consisting only of normal recurring adjustments) have been included. The
results of operations for an interim period are not necessarily indicative of
the results for an entire year.
Note 2. Computation of Earnings Per Share (EPS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(In thousands, except per share data) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
(A) Net income $ 7,100 $ 7,100
-----------------------------------------------------------------------------
(B) Weighted average outstanding
shares during the period 16,948 17,654
Additional common shares issuable
under employee stock option plans
using the treasury stock method (1) 132 174
-----------------------------------------------------------------------------
(C) Weighted average number of common
shares outstanding assuming
exercise of stock options 17,080 17,828
-----------------------------------------------------------------------------
(A)/(B) Net income per common share $ .42 $ .40
-----------------------------------------------------------------------------
(A)/(C) Net income per common share -
assuming dilution $ .42 $ .40
-------------------------------------------------------------------------------
</TABLE>
(1) First quarter of 1997 per common share data has been restated to
conform to the provisions of SFAS No. 128.
6
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
Note 3. Subsequent Event - Acquisition of RISCORP
Effective April 1, 1998, Zenith Insurance Company, a wholly-owned subsidiary of
Zenith, acquired substantially all of the assets and assumed certain liabilities
of RISCORP, Inc. and certain of its subsidiaries (collectively, "RISCORP"),
related to their workers' compensation business.
The total purchase price, to be paid in cash, will be the difference between
the GAAP book value of the assets purchased and the GAAP book value of the
liabilities assumed by Zenith as of April 1, 1998, subject to a minimum cash
purchase price of $35 million. At closing, Zenith paid the minimum cash
purchase price and repaid $15 million of indebtedness owed by RISCORP. The
final purchase price cannot be determined at this time because it is subject
to audit and a dispute resolution process. It is anticipated that the
purchase price will probably be determined in the third quarter of 1998.
The acquisition will be accounted for using purchase accounting. The excess of
the purchase price over the estimated fair value of the acquired net assets, if
any, will be recorded as goodwill.
As part of the closing, Zenith Insurance Company entered into Assumption and
Indemnity Reinsurance Agreements with each of the three insurance
subsidiaries of RISCORP, Inc. effective April 1, 1998.
Set forth below is certain selected consolidated financial information with
respect to RISCORP, Inc. that has been excerpted from the information
contained in RISCORP, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1997. Zenith takes no responsibility for the accuracy or
completeness of this information.
Certain Selected Consolidated Financial Information of RISCORP, Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended
(In thousands) 12/31/97
- --------------------------------------------------------------------------------
<S> <C>
Operating Results:
Premiums earned .............................................. $179,729
Fee and other income.......................................... 20,369
Net investment income......................................... 16,447
Total revenues ............................................... 218,091
Net income ................................................... 7,286
- --------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Certain Selected Consolidated Financial Information of RISCORP, Inc.
(In thousands) 12/31/97
- --------------------------------------------------------------------------------
<S> <C>
Balance Sheet:
Invested assets ............................................... $223,481
Receivable from reinsurers, state trust funds and other........ 346,365
Total assets .................................................. 749,650
Unpaid loss and loss adjustment expense ....................... 437,038
Total liabilities ............................................. 586,117
Stockholders' equity .......................................... 163,533
- --------------------------------------------------------------------------------
</TABLE>
Note 4. Comprehensive Income
As of January 1, 1998, Zenith adopted SFAS No. 130 "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and
presenting comprehensive income and its components in a full set of financial
statements. Comprehensive income includes all changes in stockholders' equity
(except those arising from transactions with stockholders) and includes net
income and changes in net unrealized appreciation (depreciation) on investments.
The new standard requires only additional disclosures in the consolidated
financial statements; it does not affect the financial position or results of
operations.
Note 5. Costs of Computer Software Developed or Obtained for Internal Use
Zenith adopted SOP 98-1 "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use" ("SOP 98-1") effective January 1, 1998. SOP 98-1
requires certain internal and external costs associated with computer software
developed or obtained for internal use to be capitalized following the criteria
set forth therein.
Note 6. Common Stock
During January 1998, Zenith repurchased 929,980 shares of its common stock on
the open market for a total purchase price of $23.3 million.
8
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
Zenith's principal source of consolidated earnings is the income, including
investment income, from operations of its property-casualty insurance business.
The comparative results of operations are set forth in the table below, followed
by a discussion of significant changes.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Three months ended
March 31,
(In thousands) 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Investment income, after taxes ................ $ 8,282 $ 8,265
Realized gains on investments, after taxes .... 1,573 1,219
- ----------------------------------------------------------------------------
Sub-total ..................................... 9,855 9,484
- ----------------------------------------------------------------------------
Property-Casualty underwriting, after taxes:
Income (loss) excluding catastrophes ....... 1,632 (423)
Catastrophe losses ......................... (3,250) (910)
- ----------------------------------------------------------------------------
Property-Casualty underwriting loss ........... (1,618) (1,333)
- ----------------------------------------------------------------------------
Income from real estate operations, after taxes 152 157
Interest expense, after taxes ................. (645) (738)
Parent expenses, after taxes .................. (644) (470)
- ----------------------------------------------------------------------------
Net income .................................... $ 7,100 $ 7,100
- ----------------------------------------------------------------------------
</TABLE>
9
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
Property-Casualty Insurance Operations
Premiums earned, underwriting results and combined ratios before taxes for the
three months ended March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
(Dollars in thousands) 1998 1997 Change
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums earned
Workers' compensation
California ........................ $ 29,897 $ 33,945 (12%)
Outside California ................ 25,899 26,800 (3%)
---------- ----------
Total workers' compensation ......... 55,796 60,745 (8%)
Other property-casualty ............. 55,075 52,724 4%
Reinsurance ......................... 7,913 8,894 (11%)
---------- ----------
Total ............................ $ 118,784 $ 122,363 (3%)
---------- ----------
---------- ----------
Underwriting income (loss) before taxes
Workers' compensation ............... (5,321) (5,981)
Other property-casualty ............. (721) 972
Reinsurance ......................... 3,706 3,005
---------- ----------
Total ............................ $ (2,336) $(2,004)
---------- ----------
---------- ----------
Combined loss and expense ratios
Workers' compensation
Loss and loss adjustment expenses . 76.0% 78.4%
Underwriting expenses ............. 33.4 33.0
Dividends to policyholders ........ 0.1 (1.6)
---------- ----------
Combined ratio ................... 109.5% 109.8%
Other property-casualty
Loss and loss adjustment expenses . 69.8% 67.4%
Underwriting expenses ............. 31.5 30.8
---------- ----------
Combined ratio ................... 101.3% 98.2%
Reinsurance
Loss and loss adjustment expenses . 38.6% 51.6%
Underwriting expenses ............. 14.6 14.6
---------- ----------
Combined ratio ................... 53.2% 66.2%
Total Property-Casualty
Loss and loss adjustment expenses . 70.7% 71.7%
Underwriting expenses ............. 31.3 30.7
Dividends to policyholders ........ -- (0.8)
---------- ----------
Combined ratio ................... 102.0% 101.6%
---------- ----------
---------- ----------
</TABLE>
10
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
Underwriting results declined for the three months ended March 31, 1998 compared
to the corresponding period in 1997 principally because of catastrophe losses
from California wind and storm damage sustained by Other Property-Casualty
operations. The catastrophe losses amounted to $5.0 million, before taxes, which
added 4.2 points to the total combined ratio for the first quarter of 1998
compared to $1.4 million, before taxes, which added 1.1 points to the total
combined ratio for the corresponding period in 1997. Excluding catastrophe
losses, the total combined ratio for the first quarter of 1998 and 1997 was
97.8% and 100.5%, respectively.
Workers' compensation results improved slightly in the first quarter of 1998
compared to the corresponding period in 1997, and significantly compared to the
twelve months ended December 31, 1997. The decline in premium volume occurred
primarily in California. Although premiums earned from Florida business are
expected to increase in 1998 as a result of the acquisition of certain assets,
liabilities and the workers' compensation business of RISCORP effective April 1,
1998, the impact of the acquisition on the results of operations cannot be
determined at this time.
Competition in the workers' compensation business continues to be intense and
profitability is dependent upon the ability to maintain adequate rates, manage
claims costs and keep operating expenses in line with premium volume. Zenith is
unable to predict when its California workers' compensation operation will
return to underwriting profitability that is consistent with Zenith's historical
experience.
Other Property-Casualty premium volume for the three months ended March 31, 1998
is consistent with that of the corresponding period in 1997. Underwriting
results declined primarily due to catastrophe losses as described above
amounting to $3.3 million, after taxes, for the first quarter of 1998 compared
to $.9 million, after taxes, for the first quarter of 1997.
Reinsurance premiums earned declined in the three months ended March 31, 1998
compared to the corresponding period in 1997 due primarily to selected
non-renewal of certain reinsurance treaties and softening of property
catastrophe rates. The decrease in loss and loss adjustment expense ratio for
Reinsurance is primarily due to favorable development for certain treaties.
Investments
Fluctuations in interest rates continue to impact the market value of fixed
maturity securities classified as available-for-sale. At March 31, 1998, the
unrealized appreciation on such fixed maturities was $6.7 million, before
deferred taxes, compared to an unrealized appreciation of $7.7 million, before
deferred taxes, at December 31, 1997. This change resulted in a decrease in
stockholders' equity of $651,000, after deferred taxes, between December 31,
1997 and March 31, 1998. Stockholders' equity will continue to be affected by
volatility in the fixed maturity securities market.
11
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
Investment income for the three months ended March 31, 1998 is consistent with
that of the corresponding period in 1997.
The yields on invested assets, which vary with the general level of interest
rates, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Three months ended
March 31,
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Investment yield, before taxes 5.68% 5.69%
Investment yield, after taxes 3.76 3.78
- -----------------------------------------------------------------------------
</TABLE>
Bonds with an investment grade rating represented 97% and 96% of the
consolidated carrying values of fixed maturities at March 31, 1998 and December
31, 1997, respectively. The average maturity of the investment portfolio was 4.2
years at March 31, 1998 and December 31, 1997.
The change in the carrying value of Zenith's consolidated investment portfolio
during the three months ended March 31, 1998 is as follows:
<TABLE>
<CAPTION>
(In thousands)
- -----------------------------------------------------------------------------
<S> <C>
Carrying value at December 31, 1997 ................ $ 879,973
Purchases at cost .................................. 75,664
Maturities and redemptions ......................... (35,112)
Proceeds from sale of available-for-sale investments (81,542)
Net realized gain
Available-for-sale ............................ 2,191
Other ......................................... 229
Total .................................... 2,420
Change in unrealized gains ......................... 614
Increase in short-term investments ................. 9,024
Net amortization of bonds and preferred stocks
and other changes ............................. (164)
- -----------------------------------------------------------------------------
Carrying value at March 31, 1998 ................... $ 850,877
- -----------------------------------------------------------------------------
</TABLE>
The decrease in the investment portfolio from December 31, 1997 to March 31,
1998 is principally due to treasury stock repurchases in January of 1998 of
929,980 shares for a total of $23.3 million.
12
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
Liquidity and Capital Resources
Zenith is principally dependent upon its portfolio of marketable securities and
the investment yields thereon; dividends from its insurance subsidiaries, whose
operations are supported by their own cash flows; and available lines of credit
to pay its expenses, service debt and pay any cash dividends which may be
declared to its stockholders.
Zenith has three revolving lines of credit available with aggregate availability
of $100 million. As of March 31, 1998, there were no outstanding balances on
these unsecured lines of credit.
The decrease in net cash flows from operations for the three months ended
March 31, 1998 compared to the corresponding period in 1997 is primarily due to
increase in real estate construction costs paid.
During January of 1998, Zenith repurchased 929,980 shares on the open market for
a total purchase price of $23.3 million. The repurchase was funded by proceeds
from sale and maturities of certain securities.
On February 24, 1998, the Board of Directors declared a regular quarterly cash
dividend of $0.25 per share on the outstanding shares, payable on May 15, 1998
to stockholders of record at the close of business on April 30, 1998.
RISCORP Acquisition
Effective April 1, 1998, Zenith Insurance Company, a wholly-owned subsidiary of
Zenith, acquired substantially all of the assets and assumed certain liabilities
of RISCORP, Inc. and certain of its subsidiaries (collectively, "RISCORP"),
related to their workers' compensation business.
The total purchase price, to be paid in cash, will be the difference between
the GAAP book value of the assets purchased and the GAAP book value of the
liabilities assumed by Zenith as of April 1, 1998, subject to a minimum cash
purchase price of $35 million. At closing, Zenith paid the minimum cash
purchase price and repaid $15 million of indebtedness owed by RISCORP. The
final purchase price cannot be determined at this time because it is subject
to audit and a dispute resolution process. It is anticipated that the
purchase price will probably be determined in the third quarter of 1998.
As part of the closing, Zenith Insurance Company entered into Assumption and
Indemnity Reinsurance Agreements with each of the three insurance
subsidiaries of RISCORP, Inc. effective April 1, 1998.
13
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
Codification of Statutory Accounting Principles
In March of 1998, the National Association of Insurance Commissioners approved
the codification of statutory accounting principles, clearing the way for states
to adopt the codification which provides a comprehensive basis of statutory
accounting and reporting for use by insurance departments, insurers, and
auditors. Currently, it is not known which states will adopt the codification;
therefore, the implementation date cannot be determined. Implementation of the
codified statutory accounting principles may affect the surplus level and the
capitalization requirements of Zenith's insurance subsidiaries on a statutory
basis. Zenith has not determined the impact of this codification.
Forward Looking Information
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements if accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those discussed. Forward-looking statements include those
related to the plans and objectives of management for future operations, future
economic performance, or projections of revenues, income, earnings per share,
capital expenditures, dividends, capital structure, or other financial items.
Statements containing words such as expect, anticipate, believe, or similar
words that are used in Management's Discussion and Analysis of Financial
Condition and Results of Operations, in other parts of this Report or in other
written or oral information conveyed by or on behalf of Zenith are intended to
identify forward-looking statements. Zenith undertakes no obligation to update
such forward-looking statements, which are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include but are not limited to the
following: (1) heightened competition, particularly intense price competition;
(2) adverse state and federal legislation and regulation:(3) changes in interest
rates causing a reduction of investment income; (4) general economic and
business conditions which are less favorable than expected; (5) unanticipated
changes in industry trends; (6) adequacy of loss reserves; (7) catastrophic
events or the occurrence of a significant number of storms, and wind and hail
losses; (8) ability to timely and accurately complete the Year 2000 conversion
process; (9) impact of any failure of third parties with whom Zenith does
business to be Year 2000 compliant and (10) other risks detailed herein and from
time to time in Zenith's other reports and filings with the Securities and
Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
14
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- --------------------------------------------------------------------------------
(a) Exhibits
3.1 Certificate of Incorporation of Zenith as in effect immediately prior to
November 22, 1985. (Incorporated herein by reference to Exhibit 3 to
Zenith's amendment on Form 8, date of amendment October 10, 1985, to
Zenith's Current Report on Form 8-K, date of report July 26, 1985.)
Certificate of Amendment to Certificate of Incorporation of Zenith,
effective November 22, 1985. (Incorporated herein by reference to Zenith's
Current Report on Form 8-K, date of report November 22, 1985.)
3.2 By-laws of Zenith, as currently in effect. (Incorporated herein by
reference to Exhibit 3.2 to Zenith's Annual Report on Form 10-K for the
year ended December 31, 1988.)
11 Statement re computation of per share earnings. (Note 2 of the consolidated
financial statements included in Item 1 of Part I of this Quarterly Report
on Form 10-Q is incorporated herein by reference.)
27 Financial data schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the Registrant for the quarter ended
March 31, 1998.
15
<PAGE>
ZENITH NATIONAL INSURANCE CORP.
Signatures
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ZENITH NATIONAL INSURANCE CORP.
Registrant
Date: May 15, 1998 /s/ Stanley R. Zax
-----------------------------------
Stanley R. Zax
Chairman of the Board and President
(Principal Executive Officer)
Date: May 15, 1998 /s/ Fredricka Taubitz
-----------------------------------
Fredricka Taubitz
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
16
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